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Peer-to-peer lending needs a new name
Jun 1st 2013 | San Francisco |From the print edition
FINANCE is seldom romantic. But the idea of peer-to-peer lending comes close.
This is an industry that brings together individual savers and lenders on
online platforms. Those that want to borrow are matched with those that want to
lend. Banks and credit-card firms are kept out of the picture. Talk to enough
people in the field and someone is bound to mention the democratisation of
finance .
But as the industry matures, it is moving away from its roots of relying on
individual lenders alone for its supply of capital. Institutional money is
flowing onto the platforms as well. That is particularly true in America partly
because money managers there are more used to investing in credit, partly
because retail investors have more regulatory hoops to jump through.
The two biggest lending platforms in America are Lending Club and Prosper, both
based in San Francisco. Lending Club is the industry s leading light. It was
set up in 2007 by Renaud Laplanche, a Frenchman who previously founded a
software firm that was acquired by Oracle. The bulk of its lending is for debt
consolidation by credit-card borrowers. With no legacy business to protect or
branch networks to pay for, it can offer borrowers a rate of 14%, well below
standard charges of 18%.
That kind of price advantage keeps demand high. Lending Club made possible
$140m of loans in April. Its revenues, from fees charged to borrowers and
lenders, will amount to about $100m in 2013, and Mr Laplanche hopes to double
that in 2014. The firm has had positive cashflow for the past three quarters
and got a seal of approval in May when Google took a stake. Mr Laplanche is coy
about what the relationship with Google will bring, but the investment
establishes a benchmark for an IPO slated for some time next year. The deal
valued the firm at $1.6 billion.
As for the supply of capital, institutional investors now account for
two-thirds of loan volumes. We haven t used the term peer to peer for the
past three years, just like Facebook doesn t call itself a social network,
says Mr Laplanche. Investors such as insurers and sovereign-wealth funds have
assigned pots as big as $100m.
Prosper, which was founded in 2006 and also targets America s $700 billion pile
of credit-card debt, is equally keen to tend its institutional base. It has had
a bumpier ride than Lending Club but a new funding round this year brought in
Sequoia, a leading venture-capital firm, as the firm s biggest shareholder. It
also installed new manager, headed by Stephan and Aaron Vermut, a
father-and-son combination.
Prosper is not yet profitable but the institutional capital is also flowing in
fast. This is the first time in history that non-bank investors can get access
to unsecured consumer-credit products, says Aaron Vermut. The Vermuts have
mimicked Lending Club by setting up two pools of loans. One contains whole
loans that institutions can snap up; the other is a fractional pool , in which
loans are divvied up among lenders, mostly retail investors.
CommonBond, a start-up based in New York, is taking aim at another great lump
of American household debt: student loans. By targeting MBA students and
graduates, it can cream off a creditworthy population of borrowers with proven
earning power and offer a lower interest rate than the government s student
loans. Its first fund was for 40 MBA students and graduates at the Wharton
School of the University of Pennsylvania.
The second fund is more ambitious. It will finance 1,500 students in 20
schools. The first fund drew on Wharton alumni for capital; this time around
family offices, hedge funds and community banks are participating (it already
has commitments for over $100m). And whereas the first fund was as simple as
could be, the next one will be structured and securitised.
The draw of institutional money for peer-to-peer lenders is simple. It soups up
growth, and increases capacity. It also makes it easier to think about offering
longer-term products than the consumer loans which have been the industry s
staple to date. Mr Laplanche reels off a list of areas in which Lending Club
plans to expand, from student debt to business loans.
Some retail investors worry that they will get squeezed out. The firms are
adamant they will not. One reason is that borrowers still like the idea of
being lent to by other individuals, not by faceless pots of capital. Stephan
Vermut at Prosper reckons that the social aspect to the site encourages higher
repayment rates. David Klein, one of CommonBond s founders, stresses the
importance of having MBA alumni fund students to create a sense of community.
Love at first flight
The firms are also unlikely to ditch a stable source of funding. Some
individuals invest via retirement accounts, offering a predictable flow of
capital. Mr Laplanche says that Lending Club s largest monthly inflow of retail
money came in August 2011, when Standard & Poor s downgraded America s credit
rating. Investors pulled money from the stockmarket and put it into what they
regarded as the safer option.
The industry is no less appealing for its evolution. A glut of capital ought to
keep things affordable for borrowers and increase liquidity. And regulators are
pleased to see a growing alternative to mainstream banks that matches assets
and liabilities and does not load up on leverage. We are a more efficient way
of consumer lending and capital allocation, says Mr Laplanche. That
description may not have the romantic ring of peer-to-peer lending but it does
set the stage for the industry to have a greater impact.